Surgalign Holdings, Inc.

Greetings and welcome to the Surge Aligned Holdings Incorporated First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Lyle, Chief Financial Officer. Thank you, sir. You may begin.

Good afternoon, and thank you for joining us today. I'll start with our customary Safe Harbor statement and turn the call over to our CEO, Terry Rich. I'll then cover our financial results, capital allocation plans, and some key initiatives underway before we open up the call for questions. Our Chief Accounting Officer, Chris Thunander, will be here as well to answer questions. I'd like to remind everyone that on today's call and webcast, Management will be making forward-looking statements about future events, Surgiline's business strategy, and future financial and operating performance. Actual results could differ materially from those stated or implied by these forward-looking statements due to the risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in today's earnings release and Surgiline's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, May 10, 2022. Surge Align undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. In addition, this conference call may include a discussion of non-GAAP financial measures. Please see today's earnings release for further details, including a reconciliation of the GAAP to non-GAAP results. With that, I would like to turn the call over to Terry. Terry?

Thanks, Dave, and good afternoon. It's been a little less than two months since we reported our fourth quarter in 2021 annual results and discussed our most recent milestones, our equity investment in internal networks, which was late Q4 event, and FDA 510K clearance, for our HoloPortal surgical guidance system, which occurred in the first quarter. We've made significant progress since, and the momentum is building. In the first quarter, we delivered revenue of $20.6 million, which came in ahead of our expectations. When the year began, COVID-related issues were still impacting elective procedures, and as a result, January started off slow. However, as the environment improved, we saw an increase in surgical volumes and thus stronger revenue. While hospitals still face some staffing issues, I'm pleased to report the market conditions have continued to improve, and we expect to see top-line improvements throughout the year. This is a key takeaway and one of the factors leading to our increased revenue guidance. Today, I'll provide more color around the market opportunity related to our holosurgical acquisition and interneural networks investment, what we envisioned, what we've accomplished, and our strategy to bring these revolutionary technologies to the healthcare market. This should provide you with more insight into our commercialization plans, the resources needed to drive adoption, and why we pursued the equity raise at the time we did. Most of my comments will focus on the market opportunity ahead of us and our strategy to unlock shareholder value. I firmly believe Surgilign will be a substantially different company, beginning in earnest in 2023 and into 2024 and beyond. We have opportunities to grow product revenue as we continue to innovate, expand our portfolio, and leverage distribution, as well as capture market share. While we anticipate growth in the spine device market, especially if market conditions continue to improve, the greatest opportunity for value creation is through the HoloAI platform and the complementary technology interneural networks brings to the table. Artificial intelligence, or AI, is already well recognized and expected to revolutionize the medical field in so many ways. Our HoloPortal surgical guidance system is the first system cleared for surgery combining AI and AR. And the AI in this application provides automatic segmentation of the anatomy and suggests a surgical plan to the user that is specific to each patient. We intend to build upon these AI applications to deliver greater clinical value to surgeons, facilitate cost savings to hospitals, and improve outcomes for patients. The vision for our HoloAI platform, which is currently under development, is much more grand, as it can expand our footprint outside of the operating room. When our HoloAI platform is integrated into a hospital's IT environment and leveraged by healthcare providers, I believe we can become the first company in the world to deliver predictive outcomes related to the spine. We are bullish that surgeons, institutions, payers, and patients will be drawn to this digital healthcare solution. We have numerous AI algorithms which can be applied beyond spinal anatomy into other various medical disciplines to drive improvements more broadly in healthcare, thus improving patient lives through insights from data, diagnostics, pre-op, surgery, and post-op. This was the premise for our vision and the driving force behind our transactions. but we also knew and still believe that the applications within AI are limitless. We know the spine market. It is our core foundation, and we believe we have a strong product portfolio, distribution, and medical network. Thus, it's logical that our initial focus with AI relates to spine care. We are going to start providing the tools to help surgeons perform better spine surgery in the OR but our broader vision is to improve patient outcomes by touching every part of the continuum of care, not just surgical procedures and not just related to the spine. So first, our journey begins with the HoloPortal surgical guidance system, which is used intraoperatively to guide surgeons through spinal procedures, leveraging AI and AR technologies. The augmented reality improves visualization and reduces the surgeon's cognitive load in the operating room. It's the AI platform, however, that differentiates us from our competitors. Our AI automatically segments the spinal anatomy and suggests a surgical plan which the surgeon can follow or adjust and helps improve user confidence, efficiencies, and outcomes in the operating room. Second, we plan to apply HoloAI technology outside of the operating room to perform autonomous analysis of both diagnostic imaging and post-op results. Here, data is collected and applied to better understand the patient's condition, severity of disease, comorbidities, and other relevant data to support the surgeon and medical team in developing the treatment algorithm. Currently, With MRIs, CT scans, x-rays, et cetera, a set of human eyes looks at a shade of gray on an image and makes decisions on where to measure. They cannot analyze every single pixel like a computer can. Our algorithms are designed to differentiate bone, soft tissue, vascular, and nervous structures from one another in these common forms of medical imaging down to the pixel level. After our software identifies the anatomical structure, we can take very specific volumetric measurements and quantify values that are clinically relevant in developing the treatment algorithm. Our first clinical applications for the HoloAI platform in spine will be stenosis and disc degeneration. As an example, in the evaluation of a patient presenting with potential spinal pathologies, The algorithms are autonomously provide precise quantifiable volumetric analysis of the severity of the spinal stenosis, eliminating potential for human error and with greater efficiency. We also believe this can make payer prior authorization and workflows more efficient and provide physicians with more data to drive better clinical decision-making that will improve patient outcomes. We will build on those capabilities to address a variety of other pathologies in spine. With the addition of interneural networks to the HOLO platform, we will extend into intracranial indications. Our first application will be to autonomously identify and monitor the surveillance of aneurysms over time. We will then follow on with additional clinical applications to autonomously identify and monitor highly complex diseases such as Alzheimer's, multiple sclerosis, dementia, autism, tumors, stroke, and other pathologies in the brain. Third, the whole AI platform has neural networks that we are applying to many other musculoskeletal areas and a variety of organs and vessels to include liver, lung, kidneys, et cetera. Our strategy is to expand our HoloAI platform to other medical specialties and many other types of diagnostic and treatment therapies. We believe the HoloPortal surgical business, although a substantial market opportunity, will most likely be a smaller piece of the pie when you consider the role AI will play in developing the appropriate course of treatment, as many patients who seek medical care never undergo surgery. Our platform approach will enable us to quickly add on capabilities for other parts of the body and broaden our capabilities across the entire continuum of healthcare with data as the central component. So right now, we are focused on the spine and intracranial shortly thereafter, but our strategy is to expand our platform so that we can significantly participate in the broader markets within medicine. As we think about our market opportunity and what we see as the addressable market, there are so many different ways of addressing this question. The reality is the market today is not what we envision the market of the future because we intend to move far beyond spine and surgery as we expand our HoloAI platform. But look at a few data points to show our addressable market today. In the United States, there are more than 7,000 hospitals and over 200,000 operating rooms. There are approximately 1.5 million instrumented spinal procedures performed here annually, and published research based on patient-reported outcomes shows that as many as 40% resulted in non-successful outcomes. There is certainly room for enhancements, and many clinicians we've spoken with agree that significant improvements to outcomes will occur through innovation in digital technology and big data. The surgical navigation robotics market continues to be an area where hospitals are willing to invest, and it's an estimated this will grow to an $8 billion market by the end of 2025. So if we couple the existing spine hardware and biologics markets we play in today with the navigation robotics piece, and then layer in our unique opportunity with AI in diagnostic imaging and big data, the addressable market for Surgilign is billions of dollars annually, and again, this is just for spine surgeries. It does not represent the full power of our AI networks applied to diagnostics, intervention, and continuums in other areas of medicine. Looking at the broader market opportunity, and considering other applications that will be built into our AI platform over time. We're talking about a 200 plus billion dollar market opportunity for AI and healthcare for the next 10 years. And you better believe Surgilign will be a leading player in this space. So how do we get there? First, we focus on early adoption of our HoloPortal system. As I've mentioned previously, There will be different sales models available for commercialization. We sell the system outright as a capital sale, have a fee per use model, rental models, or lease options. As we're in the initial stages, it's hard to predict what the split will be as budgeting decisions, operating room needs, and discretionary spend varies. As I mentioned previously, in Q1, we received 510 clearance for the use of the HoloPortal surgical guidance system in the lumbar spine, the first major milestone as we now begin commercialization of our digital health platform of the future. This was the culmination of more than six years of development led by pioneers in the augmented reality, AI, big data mining, and medical communities. We have now moved into the early stages of commercial launch. Last week, we reached another major milestone. In line with our expectations, we had our first site up and running and performed our first successful case using our HoloPortal system. I'd like to thank and congratulate the entire Surgilign team. As we move through the year, we'll have more data and feedback to more accurately assess the models that work best and the result in quicker adoption. As a reminder, We have plans to have additional sites up and running this quarter, and our goal is to have at least 10 to 15 operational by year end with a broader commercial launch early in 2023. And the total revenue generated from one unit per year is expected to be approximately one to one and a half million dollars. Over the next two years, our focus will be on commercialization of the Hortle HoloPortal system, integrating relevant procedural technologies and expanding our HoloAI platform capabilities. We will do this through data aggregation, upgraded algorithms, continued investments in innovation, and by pursuing expanded indications and FDA clearances, all focused on bringing new solutions to market powered by HoloAI technology. We believe as new applications are layered onto our platform, we will create new and recurring revenue streams and operate on a lower cost basis with greater bottom line impact. The development team we acquired with the whole search acquisition and investment internal networks are the biggest assets in transactions and have dramatically expanded our capabilities in building AI and machine learning algorithms. We have a platform. Now it's about building scale, new networks that can run on top of our platform to improve patient lives. To get there, we have to invest. The opportunity is clear, as is our strategy. To commercialize the technology, enhance our operational capabilities as we scale, to support sales and marketing efforts, we will require capital. That is the primary reason we did the equity raise in Q1 to extend our runway, allowing us to enhance our team and resources, opportunistically invest, and move beyond the R&D stage. Without that capital, we would have had to scale back resources needed to achieve the necessary HoloPortal cases, which have begun and will be ramping throughout the year. We are laser focused on moving from R&D to full-scale commercialization in early 2023. We are incredibly excited about the future at Surgilign. The power of Holo and Interneurial Networks platform technologies have the potential to revolutionize the healthcare industry. We are also proud of the talent we've hired and the progress made to update our existing spine portfolio and are excited about the cadence of new product introductions that will support adoption within the spine market. This year is critical for SurgeLine, and I am confident in our ability to execute our plan and realize our full potential. With that, I'd like to turn the call over to Dave.